What are California’s Bulk Sale laws and how do they impact acquisitions?
Takeaway: California's Bulk Sale law is a niche compliance requirement that applies only to asset sales by specific types of small businesses, and it is almost never relevant to the acquisition of a typical venture-backed technology startup.
As you and your lawyer work through the due diligence checklist for a sale of your company, you may encounter a seemingly archaic and obscure legal question: does this transaction need to comply with California's Bulk Sale Law? For 99% of technology and life science startup acquisitions, the answer is a simple and immediate no.
However, understanding what this law is and why it generally doesn't apply is a useful piece of legal knowledge for any founder.
What is the Purpose of a Bulk Sale Law?
A bulk sale law is a consumer protection statute designed to protect the creditors of a small business. Its purpose is to prevent a business owner from selling all of their assets to a buyer for cash and then disappearing with the money, leaving their suppliers and other creditors unpaid.
The law creates a formal notification process. It requires the seller to give its creditors advance notice of the pending "bulk sale" so that the creditors have an opportunity to make a claim on the sale proceeds before the seller vanishes.
Why Doesn't It Apply to Most Startups?
California's Bulk Sale law is very narrow in its application. It only applies to businesses whose principal business is the sale of inventory from stock, or a restaurant. Furthermore, it only applies if the value of the assets being sold is between $10,000 and $5,000,000.
A typical venture-backed startup does not meet this definition.
Your Principal Business is IP, not Inventory: A SaaS company, a biotech firm, or a deep-tech hardware company's principal asset is its intellectual property, not its physical "inventory."
Your Value Exceeds the Threshold: A successful, venture-backed company being acquired will almost always have a valuation far in excess of the $5 million threshold.
Because a typical tech startup's acquisition does not meet these criteria, it is exempt from the Bulk Sale law's requirements.
The Rare Exception
The only time this might become relevant is in the case of a very early-stage e-commerce or hardware company that is being sold in a small "acqui-hire" or a distressed asset sale where the valuation is under $5 million. In this rare scenario, your M&A counsel would need to analyze whether the transaction triggers the notification requirements of the Bulk Sale law.
For the vast majority of founders, however, this is one legal complexity you do not need to worry about. It is a niche law for a different type of business, and it is a reminder that not every law on the books is relevant to the unique world of high-growth technology startups.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.